July 10, 2014
Enforcement at FERC
Posted by Max Minzner

Regulatory enforcement is a difficult task.  It combines the challenges of traditional criminal enforcement with the concerns about capture and other weaknesses of administrative law.  Yesterday I introduced FERC as a case study of regulatory enforcement.  The Energy Policy Act of 2005 dramatically expanded FERC’s enforcement authority and required the agency to think hard about how to use its new power to impose large penalties for regulatory violations.  In my view, FERC has met the challenge very successfully.  (As I mentioned yesterday, I took leave from academia to work at FERC in the Office of Enforcement and was personally involved in some of these efforts.). 

After the statutory changes expanding its authority, FERC brought numerous significant enforcement actions.  These cases have frequently targeted large financial entities that allegedly manipulated the energy markets.  The sanctions in these cases have been large by any measure.  They include a settlement with a JP Morgan subsidiary for $285 million in civil penalties and $125 million in disgorgement. 

FERC has mostly received positive press for its enforcement activities. Very recently, though, The Wall Street Journal has published a series of pieces that have claimed that FERC has been overaggressive and has engaged in prosecutorial abuse.  In particular, the Journal has argued that FERC has been unfair to investment banks and hedge funds accused of manipulating the wholesale energy markets. I think these attacks are seriously wrong.  In fact, FERC is in many ways an exemplary regulatory enforcement agency.

In particular, FERC has taken two key steps as matter of policy to improve its regulatory enforcement regime. First, in 2009, FERC committed to disclose exculpatory information relating to any enforcement action to the target of its enforcement activities. It may seem surprising, but this step probably is not required under the Constitution.  Under Brady v. Maryland, criminal prosecutors must reveal information that suggests that the defendant is not guilty.  Because regulatory enforcement is civil, the Brady obligation does not apply as a matter of constitutional law.  Other regulatory agencies have been criticized for not providing these disclosures.  FERC, though, voluntarily imposed Brady as a matter of enforcement policy, a step taken by comparatively few enforcement agencies.

Second, as I discussed in a previously, penalty ambiguity is a serious flaw with most civil enforcement.  Federal agencies frequently provide little or no guidance to the regulated community about how civil penalties are calculated.  Opaque penalties are very hard to defend – shaping behavior by deterring misconduct is a primary reason agencies impose penalties.  If the targets of civil enforcement do not know how penalties are calculated, they cannot respond to the incentives created by enforcement.  FERC has also been a leader in penalty transparency.  In 2010, it published an extensive policy statement outlined a set of penalty guidelines that provide a mechanism to calculate the likely range of penalties in any given enforcement action.  Equally important, it has continued to cite and rely upon its penalty guidelines in enforcement actions.

In these and other respects, FERC enforcement has been a leader among federal agencies in ensuring the transparency and fairness of its enforcement program.  Equally important, FERC’s enforcement has been an example of bipartisan success.   Both the Republican and the Democratic members of the Commission supported these policy statements and have voted in favor of FERC’s significant enforcement settlements.  FERC is a model of fair, effective, and bipartisan enforcement that other federal agencies should follow. 

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